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VOL. 6 | NO. 45 | Saturday, November 2, 2013

East Memphis Office Market Continues to Tighten

By Michael Waddell

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Class A office space in East Memphis continues to be a strong performer thanks to the convenience and quality of buildings radiating from the Poplar/Interstate 240 intersection.

“East Memphis is a real bright spot regionally because if you look at the overall Memphis market it is a bit flat,” said Kemp Conrad, president of Cushman & Wakefield/Commercial Advisors Asset Services. “The East submarket, especially with Class A space, is very strong and dynamic, with strong tenants and strong institutional ownership.”

Conrad called East Memphis one of the stronger office micro-markets in the Southeast U.S. Occupancy remains above 90 percent for Class A space around Poplar Avenue in East Memphis. Asking rental rates for East Memphis Class A office space average $24.35 per square foot, and overall Class A occupancy in the submarket is nearly 85 percent, according to the most recent Advisor Report from Cushman & Wakefield/Commercial Advisors.

“There’s been a flight to quality,” Conrad said. “I think as the Class A-plus buildings are leased up, those landlords will be able to have some pricing pressure and will be able to push rates a little bit.”

Recent deals in East Memphis include Wright Medical Group moving its headquarters to the Oaksedge office complex at Park Avenue and Cherry Road, and Adams and Reese LLP recently signing a 10-year lease for 13,500 square feet at Highwoods Properties’ Crescent Center.

The Crescent Center, Boyle Investment Co.’s 999 Shady Grove Road building and Hertz Investment Group’s three Forum buildings are collectively more than 90 percent leased, and Highwoods’ Triad buildings are approaching 90 percent full.

While rates are likely to rise at A-plus buildings in East Memphis like the Crescent Center, Triad III and International Place, Class B space is anticipated to be flat to negative simply because there’s still so much vacancy.

Overall for the Memphis office market, average asking rental rates have jumped from $15.03 per square foot at the end of last year to $16.14 per square foot as of the end of the third quarter, according to the most recent Research & Forecast Report from Colliers International. Average overall office rental rates in East Memphis are $18.95 per square foot, the highest of any Memphis submarket.

Conversely, total office vacancy rates ended the third quarter at 15.9 percent, up slightly from 15.7 percent at the end of the second quarter.

“The rising rental rates are a bit counterintuitive because the market posted increased vacancy in the third quarter,” said Frazier Baker, vice president of office services for Colliers International. “This is attributable in part to space in class A buildings shrinking; therefore, these owners have the ability to push rents while the class B market continues to increase in vacancy.”

Eugene Woods, Frazier Baker and Andy Cates of Colliers International are pictured at Triad Centre in East Memphis, the city’s hottest office market.

(Memphis News/Andrew J. Breig)

Baker cited Colliers’ recent move as a perfect example of the trend.

“We were leasing almost 8,000 square feet in a class B building off Poplar and were able relocate to a more efficient layout in a Class A building on Poplar without increasing our rental outlay,” Baker said.

Fresh office construction is underway on International Paper’s newest building, and from his new office window Baker can see a site that Boyle has ready for possible future office development next to its 999 Shady Grove building. He believes it is unlikely, given the overall vacancy rates in the market, that any developers would consider new construction in the near term unless the building is significantly pre-leased.

Conrad agreed.

“We could possibly see some more boutique-type Class A buildings in the 50,000-square-foot to 100,000-square-foot range, similar to the Legacy Center developed by David Peck a couple of years ago,” Conrad said. “I think in order to see another large building sized over 125,000 square feet to 150,000 square feet, there would probably have to be as much as 75 percent pre-leasing from one or two anchor tenants. And there aren’t that many of those to go around in Memphis.”

No significant move-outs are expected in the East Memphis submarket over the next several months, leaving Class B space as the most significant blocks of available office space.

PROPERTY SALES 79 321 2,586
MORTGAGES 90 426 3,033
BUILDING PERMITS 153 796 6,864
BANKRUPTCIES 37 213 2,000